In a demand-pull inflation,if the Reserve Bank stops expanding the quantity of money,
A)a cost-push inflation will occur.
B)a deflation will occur.
C)the demand-pull inflation ends.
D)government expenditure will cause the demand-pull inflation to continue.
E)None of the above answers is correct.

Question

Quizplus · Accepted Answer

A demand-pull inflation occurs when the demand for goods and services outpaces the supply, leading to an increase in prices. The Reserve Bank can expand the quantity of money in circulation by lowering interest rates or purchasing government securities. If the Reserve Bank stops expanding the quantity of money, the demand for goods and services will no longer be artificially stimulated, and the demand-pull inflation will gradually come to an end. A cost-push inflation is caused by an increase in production costs, so it is not relevant in this scenario. Deflation could occur if there is a decrease in the quantity of money in circulation, but in this case, the Reserve Bank is only stopping its expansionary monetary policies, not reducing the overall quantity of money. Government expenditure may contribute to demand pressures, but it is not enough to sustain a demand-pull inflation if the money supply is not also expanding. Therefore, the best choice is C.

In a Demand-Pull Inflation,if the Reserve Bank Stops Expanding the Quantity